Cross Country Healthcare Inc (CCRN) 2011 Q3 法說會逐字稿

Welcome to the Cross Country Healthcare third quarter 2011 earnings conference call. All participants are in a listen-only mode until the question-and-answer session of today's conference. (Operator Instructions). Today's conference is being recorded. If you have any objections, you may disconnect at this time.

I would now like to turn the meeting over to Mr. Howard Goldman, Director of Investor and Corporate Relations. Sir, you may begin.

Good morning and thank you for listening to our conference call, which is also being webcast and for your interest in the Company. With me today are Joe Boshart, our President and Chief Executive Officer; and Emil Hensel, our Chief Financial Officer.

On this call, we will review our third quarter 2011 results for which we distributed our earnings press release after the close of business yesterday. If you do not have a copy, it is available on our website at www.crosscountryhealthcare.com. Replay information for this call is also provided in the press release.

Before we begin, I'd first like to remind everyone that this discussion contains forward-looking statements. Statements that are predictive in nature that depend upon or refer to future events or conditions or that include words such as expects, anticipates, believes, appears, estimates, and similar expressions are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results and performance to be materially different from any future results or performance expressed or implied by these forward-looking statements. These factors were set forth under the forward-looking statement section of our press release for the third quarter of 2011 as well as under the caption Risk Factors in our 10-K for the year ended December 31, 2010 and our other SEC filings.

Although we believe that these statements are based upon reasonable assumptions, we cannot guarantee future results. Given these uncertainties, the forward-looking statements discussed on this teleconference might not occur. Cross Country Healthcare does not have a policy of updating or revising forward-looking statements and thus it should not be assumed that our silence over time means that actual events are occurring as expressed or implied in such forward-looking statements.

Also, our remarks during this teleconference reference non-GAAP financial measures. Such non-GAAP financial measures are provided as additional information and should not be considered substitutes for, or superior to financial measures calculated in accordance with U.S. GAAP. More information related to these non-GAAP financial measures is contained in our press release.

And now, I'd like to turn the call over to Joe.

Thank you, Howard, and thank you to everyone listening in for your interest in Cross Country Healthcare. As reported in our press release issued last evening, our revenue for the third quarter of 2011 was $131 million, up 13% from a year ago, and up 4% sequentially from the second quarter.

Net income in the third quarter was $1.8 million or $0.06 per diluted share. This compares to $0.03 per diluted share in the year ago quarter and $0.05 per diluted share in the second quarter. Cash flow from operations for the third quarter was $3 million.

Momentum continued to be strong in our nurse and allied staffing segment which accounted for 56% of our consolidated revenue during the quarter. Year-over-year nurse and allied staffing revenue was up 26% for the quarter and up 8% sequentially.

The broad-based resurgence in demand, I discussed on our last call, continues to drive our growth. MSP staffing service and staffing for electronic medical record implementations remain staples of our business, with MSP staffing representing approximately 25% of segment staffing volume in the third quarter.

In the current market environment, these large contracts are valuable but only when they are appropriately priced. During a period of relatively rapid growth in demand, an MSP contract with below-market pricing can be an albatross to carry.

Due to very high fill rate expectations of MSP accounts, a below-market MSP contract will inevitably result in a misallocation of currently scarce nursing resources away from higher margin clients. With more jobs, than we can currently fill, we're focusing our efforts on those positions that are most attractive.

I believe our management team has done an excellent job of balancing the desire to win large MSP contracts with an ongoing focus on growing profitability at reasonable prices. We believe the relative strength of our margins, is a testament to that focus in an increasingly more competitive environment for nursing supply.

Throughout 2011, we have continued to add new MSP accounts that we believe offer the opportunity for us to provide outstanding service at reasonable margins. We have lost others where we were unsuccessful in educating the client to understand how the market dynamics have changed and how below-market pricing was impacting our ability to service them to their expectations.

This is always a disappointing outcome, but in the current environment where demand exceeds supply, it is not one that slows our momentum.

Overall, the industry is experiencing more turnover at MSP accounts than we have seen since we began providing this service in 2003. We are however committed to continuing our disciplined approach in evaluating each MSP opportunity from an overall value proposition perspective.

This approach is equally important to increasing our supply as nurses typically look, for the most lucrative positions available. Travel nurses are very much aware of the market value of their services as they are usually fielding offers from multiple staffing companies simultaneously. Simply stated, by staying true to our strategy, we expect to attract more nurses and grow our market share while improving our contribution margin.

I would also like to speak to speculation regarding whether or not we're entering a double dip recession scenario. Currently there appears to be nothing in our metrics that would be consistent with an economic slowdown from present levels. On the contrary, net weeks booked in our contract nurse and allied business were up 24% during the third quarter, which suggests similar year-over-year comparisons in our fourth quarter working FTE count, which also bodes well as we enter 2012.

To underscore that momentum, applicant activity during the third quarter was up 35% from year ago levels. As another indicator, the average hourly bill rate for travel nurse staffing in the third quarter increased 1% year-over-year and 2% on a sequential basis.

Turning to our other operating segments, our clinical trial services business saw top line improvement in the third quarter both sequentially and compared to a year ago. But more importantly, margins in the segment were much improved versus the comparable periods and were an important contributor to our better-than-expected performance in the third quarter.

Our physician staffing business revenue was down 2% year-over-year, but up seasonally by 1% from the second quarter. This segment, which accounted for 23% of third quarter revenue continued to show signs of recovery particularly in the area of anesthesiology, which historically has been our largest specialty. And while we anticipate this business will experience a normal seasonal sequential decline in the fourth quarter, we expect that revenue in this segment will be up in the quarter year-over-year for the first time since 2008.

And just as in the second quarter, I'm especially pleased with the much improved performance of our retained physician and executive search business in the third quarter. The results of which are included in our other human capital management segment.

So in summary, the recovery in our nurse and allied staffing segment continues to be very encouraging and shows none of the signs one would expect to see from a slowing economy. Our smaller business segments are in varying stages of recovery.

For the Company as a whole, we expect revenue to be up approximately 8% for all of 2011 and our outlook for 2012 is even more optimistic.

And with that, I would like to now turn the call over to Emil, who will update you in more detail on our third quarter performance.

Thank you, Joe, and good morning, everyone. First, I will go over the results for the third quarter and then review our revenue and earnings guidance for the fourth quarter that we provided in the press release issued last evening.

Revenue in the third quarter was $131 million, up 13% versus the prior year and up 4% sequentially. The year-over-year revenue growth was driven primarily by our nurse and allied staffing segment and secondarily by our clinical trial services segment.

Our gross profit margin was 27.2%, down 80 basis points from the prior year and 20 basis points sequentially. The margin decrease was largely due to a change in business mix with a higher percentage of revenue coming from the nurse and allied staffing segment, which has the lowest gross profit margin among our four business segments.

SG&A as a percent of revenue was down 120 basis points sequentially and 80 basis points from the prior year, reflecting the improved operating leverage partly offset by higher performance based bonus accruals.

SG&A expenses in the third quarter included approximately $800,000 in equity-based compensation expenses as compared to approximately $700,000 in the prior year quarter.

Adjusted EBITDA, as defined in our press release, was $7.3 million, up 15% from the prior year and 20% sequentially. Interest expense of $730,000 was essentially flat sequentially but down 38% from the prior year quarter.

The year-over-year interest expense reduction reflects the expiration of interest rate hedge contracts in October of 2010 as well as the continued delevering of our balance sheet.

In the third quarter, we reduced our debt by $4 million, which included an optional $2.5 million term debt prepayment. The current borrowing rate on our $45 million term debt is 200 basis points over LIBOR.

Net income in the third quarter was $1.8 million or $0.06 per diluted share as compared to $0.03 per diluted share in the prior year quarter. The effective income tax rate was 51% in the third quarter, somewhat higher than the 48% to 49% rate that we expected due to the impact of certain discrete items. The full year 2011 tax rate is projected to be approximately 43%, which reflects the benefit of a reversal of uncertain tax positions in the second quarter.

Turning to the balance sheet, we ended the quarter with $46 million of debt and $14 million of cash and cash equivalents. Net of cash, our debt-to-total capital ratio was 11% and the current ratio was 2.5 to 1. Days sales outstanding were 52 days, up two days from the second quarter but down one day compared to the prior year quarter.

Our leverage ratio, as defined in our credit agreement, was just under 1.9 to 1 as compared to the 2.5 to 1 ratio allowed. At the current debt leverage ratio, we are now permitted to use our excess cash to repurchase up to $2.5 million of our common stock pursuant to our existing board authorization.

We generated $3 million of cash from operating activities in the third quarter. The excess cash supplemented with cash on the balance sheet was used to repay $4 million of term debt in the third quarter. Capital expenditures totaled approximately $800,000 during the quarter.

Let me drill down next into our four reporting segments. Revenue for the nurse and allied staffing segment in the third quarter was $73.4 million, up 26% versus the prior year and 8% sequentially.

We averaged 2,568 field FTEs in the third quarter, up 23% versus the prior year and 4% sequentially. The year-over-year increase is reflective of the improved demand environment in general and an increased number of electronic medical record implementation projects in particular where travel nurses are used to backfill for staff nurses undergoing EMR training. Such EMR implementations are expected to accelerate over the next few years as funding incentives end in 2015 under the HITECH Act, which became effective in early 2010.

The book-to-bill ratio averaged 107% in the third quarter and so far in the fourth quarter is averaging 114%. Bookings in the current quarter included fulfillment of the first of several large EMR projects expected to start in the first quarter. Based on these booking trends, we expect solid revenue momentum into the first quarter of 2012.

Segment revenue per FTE per day in the third quarter was up 2% both year-over-year and sequentially due to a combination of bill rate improvement and higher average hours for FTE.

Contribution income, as defined in our press release, was $6.3 million in the third quarter, up 27% from the prior year and 12% sequentially.

Segment contribution margin was 8.6%, up 10 basis points from the prior year. On a sequential basis, the current quarter margin increased 40 basis points benefiting from a favorable workers' compensation accrual adjustment, which was partially offset by unfavorable professional liability and health insurance accrual adjustments.

Let me turn next to our physician staffing segment. Revenue was $30.8 million in the third quarter, down 2% from the prior year, but up 1% sequentially. Physician staffing days filled were essentially flat compared to the prior year, but were up 5% sequentially. Demand for temporary physician services appears to be stabilizing and we expect a modest year-over-year increase in revenue in the fourth quarter.

Segment contribution income for the third quarter was $2.9 million, representing a 9.5% contribution margin, unchanged from the prior quarter, but down 170 basis points from the prior year. The year-over-year margin declined primarily due to higher physician expenses and lower permanent placement revenue.

Revenue in our clinical trial services segment in the third quarter was $16.8 million, up 7% from the prior year and 2% sequentially. Clinical staffing accounted for 93% of segment revenue in the third quarter.

Contribution income was $2.2 million, up 26% from the prior year and 44% sequentially. Segment contribution margin was 13.4% in the third quarter, up 210 basis points from prior year and 400 basis points sequentially.

The margin improvement was due to a turnaround of the profitability of our non-staffing businesses coupled with more favorable contract mix.

Revenue for the other human capital management services segment in the third quarter was $10.2 million, down 2% from prior year and 4% sequentially. The year-over-year revenue decline in our education business was largely offset by revenue growth in our retained search business.

Contribution income was $1 million, up 46% from prior year and 4% sequentially, driven by the strong performance of our retained search business.

This brings me to our guidance for the fourth quarter of 2011. The following statements are based on current management expectations. Such statements are forward-looking and actual results may differ materially. These statements do not include the potential impact of any future mergers, acquisitions or other business combinations, impairment charges or valuation allowances and any material legal proceedings.

We project the average nurse and allied field FTE count to be in the 2,525 to 2,575 range in the fourth quarter. Consolidated revenue for the fourth quarter is expected to be in the $126 million to $128 million range. We expect our gross profit margin to be in the 27% to 27.5% range and adjusted EBITDA margin to be in the 4.5% to 5% range.

SG&A as well as depreciation and amortization expenses are expected to remain sequentially flat. Net interest expense is expected to be approximately $600,000 in the fourth quarter. Based on these assumptions, earnings per diluted share are expected to be in the $0.03 to $0.05 range.

This EPS guidance range is based on an estimated effective tax rate in the 48% to 49% range in the fourth quarter.

For the full year, we expect revenue to be in the $505 million to $507 million range, and adjusted earnings per diluted share to be in the range of $0.14 to $0.16. And for those of you working on your financial models for 2012, while we do expect revenue momentum into the first quarter, margins are also impacted sequentially as we reset payroll taxes for W-2 employees and have one less billing day in our nurse and allied staffing segment to absorb housing costs.

This concludes our formal comments. At this time, we will open up the lines to answer any questions that you may have. Amy?

(Operator Instructions). Tobey Sommer, SunTrust.

Thanks. I was wondering if you could describe what order flow kind of looks like recently in terms of growth, not just whether it's exceeding year-ago periods, but kind of what it is on a sequential basis? Thanks.

Okay, Tobey. I would say orders have been in a range -- range bound for the last four or five months, and I would categorize it in a, as we've always done for you, about five jobs for every nurse coming off contract. So, a more than adequate amount of demand. And I would describe it -- at this point, typically we are starting to see the unwind of seasonal orders, orders that would begin before the holidays and the contracts would end in the March, early April period.

We've actually seen a buildup of orders, which is very encouraging. And probably most encouraging, we are aware of a number of electronic medical record opportunities for us to get involved in the implementation and the backfill of staffing for those implementations. We have one already booked and it's, I would say, by our standards a very attractive EMR contract given that the contracts are longer than we would typically see for such an engagement.

And we think there is probably two more that will undoubtedly start in the first quarter and potentially as many as a total of five. So we do see the prospect for even more momentum in orders as we go forward and which would be unseasonal given our experience historically.

Thanks. Joe, could you comment on the supply situation on the nursing side, either breaking it down, and if you're seeing any differences with -- among empty nesters versus more recent graduates? Thanks.

You know, Tobey, I don't have that level of granularity available to me. As I indicated in the formal comments, applicant activity is up about 35% historically and I would not expect it to change materially. The majority of our applicants are nurses in their first five years of experience.

We require a minimum of one year. But generally the bulk of the applicants are in their, early in their career. They tend to be younger as a cohort than nurses nationally. So I don't have the specific answer you're looking for. But at this point, nurse applicant activity is more than enough to sustain or grow the momentum that we've seen in the last couple of quarters.

Okay. Last question from me and I'll get back in the queue. The hospital admissions really haven't been improving, what are your -- what do you see as the drivers for the increased orders when kind of that basic driver of hospital demand doesn't appear to be on the mend? Thanks.

Yes, that's really -- I view it as an upside. I mean obviously it's a downside if the economy weakens from here. But, like I said, we're not seeing that. What normally drives our business are higher than expected hospital admissions and a strengthening in the macro labor market, the overall job market, the net jobs that come out from the Labor Department every month.

I would describe those two metrics as neither favorable or unfavorable. I think admissions have been in line with expectations and I think the job market has been directionally positive, but modestly so not enough to really generate wage momentum in the economy or really change psychology. I think a lot of people in the country still believe we are in a recessionary environment.

I think what's driving our current momentum, which is by historical standards pretty strong, I mean we haven't had 25% top line momentum in the nursing business for -- the past decade or more if you go back and look.

I think there's two things. One, the business declined more than it should have following the credit crisis, I think, hospitals just ran out of money and I think there is a level of service recovery going on that -- when hospitals just were willing to accept patient -- lower patient satisfaction scores.

At some point, you damage your brand in a marketplace and given a choice, patients choose not to go to your facility because they hear that the care is not good. And I think there is no hospital administrator that wants to be in that kind of category. And availability of credit to hospitals has improved dramatically from the post-Lehman days. So I think certainly that's part of it.

And I think the other part, which is not -- is on an incremental basis is -- it certainly can't be ignored is the momentum in the implementations of electronic health record projects throughout the country that is accelerating, there's a limit to this, it's kind of carrot and as you know, I am sure there's a carrot and stick. There's a lot of grant money available to hospitals that implement such services, such systems and can demonstrate material use by the 2015. If they don't successfully implement this technology, there's actually a stick that is brought out later in the decade where their reimbursement is affected adversely.

So, there is a increasing push to get these systems in place and we have seen a lot of benefit to us. I'm sure everyone in the industry is benefiting, but we have been very successful. And the more projects we're involved in, the bigger inventory of nurses who are skilled and versed in a specific technology that we can demonstrate to clients that we have the capability to bring people to their facility that can provide kind of bedside remediation, if you will, to nurses, staff nurses that have been taken off the floor and gone through some classroom training on the technology. A lot of nurses tend to be adult learners and need a little bit of hands-on on-the-job validation of what they learned. So this has been an important part of our business.

Right now we have no projects going on. There's -- not many hospitals would choose to begin a project like this right before the holidays. But as I indicated, there is a lot that is beginning to queue up for us in the first and second quarters which is very exciting and gives us a lot of optimism for this business in the first half of 2012 in particular.

Thank you very much.

Thank you. Thanks for calling in.

Paul Condra, BMO Capital Markets.

Hi, guys.

Hi, Paul.

Thanks for taking my call. Just to continue on the EMR, I wonder if you can talk a little bit about the margin profile of that business, in terms of gross margins and also operating margins.

Yes, they tend to be at or above average margins for us. There is a, certainly a desire of the hospital to get the right kind of candidates and they're typically willing to pay a premium for nurses that have been involved in implementations of that kind of technology. Historically, however, the duration of the contracts have been shorter, they tend to more be two month contracts than our normal 13 or 3 month -- 13 week or three month contracts.

What was very encouraging to me is we just had a -- we just fulfilled an engagement that's likely to -- expected to start early in the first quarter of 2012 that were 26 week contracts. And I think that's part of our -- I think one of the benefits we bring to clients is, we've been involved in so many at this point, we can give them a lot of information related to how other similar facilities have experienced the transition to the technology that they may have an expectation that everybody is going to be up to speed in two months, but the reality is it takes four to five months before everyone is really comfortable with the technology.

So, I do expect to see this business actually improve from a margin profile as we go forward, because I just think we are able to derive value for us and for our clients in being able to educate them as to how these projects actually play out.

Okay, great. That's helpful. Also just in the clinical segment you had really good margin expansion there and I was just wondering if something in particular drove that? Is this going to go back to those kind of levels that you had in 2007, 2008 (inaudible) that rate? Do you have any more detail there?

Well, we had a very good third quarter and, Emil, you feel free to jump in. Driven by, as Emil pointed out in his prepared comments, the recovery in our non-staffing businesses which have been very weak for more than two years. In addition, we had, I would describe it as above our expectations in permanent placements in the third quarter.

The guidance for the fourth quarter from this business is not as strong, but to your specific question, I think there is an optimism in this group that we are on the right track, we are recovering in the non-staffing businesses which tend to be higher margin businesses, and we do expect ultimately to get back to where we were, but Emil I don't know if you have anything (multiple speakers)

(Multiple speakers) that the decline that we're anticipating in the fourth quarter in terms of profit margin is really just seasonal, nothing fundamental other than the fact that in business -- this is the one business where we have bench pay, where during the holidays, field employees are paid bench time while they are off assignment. So, our margin typically is lower in the fourth quarter than the other three quarters.

Okay, great. And just one more, you have this authorization to do the share repurchases, what's your thinking about that?

Yes, go ahead.

Obviously we will look at our share price and we believe that our shares are significantly undervalued at this time. So, we will look at opportunities to execute share repurchases up to the $2.5 million authorization.

Okay, thank you.

Okay, Paul.

(Operator Instructions). Gary Taylor, Citibank.

Hi, good morning.

Hi, Gary.

I appreciate your comments just in terms of the demand outlook given hospital utilization trends. I wanted to ask more specifically, we've heard a number of hospitals talking about, weaker cardiovascular, acuity, weaker cardiovascular surgeries et cetera, and I guess I wanted to hear your comments on how that might be impacting the physician staffing business? And, I don't know if that acuity is very relevant to the nurse staffing business or not but I particularly wanted to hear what you thought that would -- impact that might be having on doc staffing.

Yes, it -- historically cardiovascular or CABG procedures were a big driver for our nursing business, as you know they've been weakening for most of the past decade. It is not a big driver today, Gary. And in the nursing business, the hottest demand in nursing tends to involve labor and delivery, OR nurses; they're not the CVICU nurses that were one of our most important specialties historically. And I think the same holds true for the physician business. Cardiovascular surgery was never a big specialty for our business for MDA.

Having said that, to some degree, the weakness that we've seen in anesthesiology certainly has been reflective of the impact that these -- the decline in procedures has had throughout the healthcare industry. But we are - as I indicated in my prepared remarks, we have seen a recovery in anesthesiology and demand for OR nurses is pretty good.

So, while there may not be a lot of open heart activity going on, there are a lot of other procedures that are drawing demand for those specialties, and we are seeing a bit of a recovery.

I should put my comments on anesthesiology in context. Historically, it was by far and away the largest specialty for MDA. Right now, it's the third largest specialty. So it's fallen by more than 50% from its near-term peak of the last several years. So while it's stabilizing, which is encouraging to us, we have a long way to go to get back to where we were.

So what are the top two specialties now?

ER --

And primary care including hospitalists.

Got it. And then my last question is, I know we've kind of discussed this before, and obviously I'm focusing on a much smaller piece of your business than the nurse and allied. But the continued trend obviously in hospital employment of physicians is helping your business or should it be helping your business more? Aren't they using you -- are they using you more to recruit physicians that they want to employ or is that not the biggest part of it?

I don't think it's been helping, I think it's actually been an headwind to the physician staffing business, the locums business. When doctors are knocking on their door asking to sell their practice or be hired on as an employee of the hospital, there is less of a sense of urgency to call the locums company and get a doc in there.

I am encouraged by the budding recovery in our retained search business.The demographics of the two businesses tend to be very different. When you're looking -- when you're beginning a retained search you're really looking for someone early in their career who is going to work for the next three decades or so. The locums doctors tend to be end of career physicians more in their 50s than their 30s. So they're complementary in that regard. So, we may not -- we're not seeing the same trends. We are seeing stabilization in the locums business, but unlike the nursing business where we're -- we've seen a bit of an inflection we're not seeing anything that remotely looks like an inflection.

If our guidance for the fourth quarter is correct, we would have five months of year-over-year improvement, say it low single-digit improvement in our locums business, which would be very encouraging for us, because we -- it has been a drag and the consolidated revenue has not really reflected the great momentum we're seeing in the nursing business.

So I think long-term, the fact that hospitals are employing more doctors is not a negative for the business. Once this trend stabilizes we've had just such a dramatic shift in the percentage of doctors employed by hospitals going from the mid 20s to the mid 50% range of all physicians in the US. That's a dramatic shift and I think it is unlikely to continue at the same rate of momentum. And I think ultimately it may actually reverse.

But until it stabilizes, I think it is likely to be a headwind to the business. Longer-term, once it stabilizes, I don't think it should be favorable or unfavorable, just -- the doctors will still need to go on vacation, there will still be unfilled positions and we will be prepared to respond to those client needs.

Okay. That's helpful. Thank you.

Okay. Thanks for calling in, Gary.

At this time we have no additional questions in queue.

Okay. Well, I appreciate everyone's time and attention and we will look forward to updating you on the fourth quarter and 2012. Thanks very much.

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